Malk Partners provides ESG due diligence and strategic advisory services to clients across the private equity middle market, as well as for Growth and Venture investors. Malk’s Growth Equity and Venture Capital team partners with firms investing in a broad spectrum of opportunities to support their ESG efforts, as ESG continues to grow in importance in the Growth and Venture space. To date, the team has conducted ESG diligence on more than 500 transactions for clients in the Growth Equity and Venture space. The team has more than 22 years of experience combined in Growth and Venture ESG work.
We spoke with Kelsey Jarrett, an Engagement Manager with Malk Partners’ Growth and Venture team, to learn more about the team’s diligence and advisory work as well as the future of ESG in Growth and Venture. The interview has been edited for clarity and length.
Q: Why did Malk create a dedicated team for Growth and Venture clients?
A: The Growth and Venture vertical was born from client need. Malk has multi-strategy clients with Growth/Venture funds, such L Catterton, that we wanted to be able to serve. However, we recognized the approach to ESG should differ for these investment strategies. Originally, our approach was a lighter touch version of PE due diligence. Since the launch of this vertical, we observed that Growth and Venture investors think about risk differently than their Buyout counterparts. Growth/Venture companies are at different stages and their capacity to manage risk varies as a result – company attributes and operations will change year over year in a way you don’t see in Buyout. For instance, as these companies can be very nascent, management teams are primarily founder-led and have yet to codify many of their processes. As a result, our teams’ reviews focus more on industry and business model, as well as future risk as the business grows, given operations will significantly evolve in the next few years. Our team adapted its diligence approach to fit this market.
Q: What are the distinctions between Growth and Venture companies?
A: For “Venture” stage companies, there may not be revenue or even a product at the time of investment – that’s the main difference between Venture and Growth. In Pre-Seed or Seed Stage, investors are often investing in an idea. It is a riskier investment. The target companies are small; there can be less than 15 people at the company. They are still figuring out product-market fit; and in some cases, they might not even have a product. By around a Series B investment, the company is more established but still a startup; they have a product and likely have demonstrated product-market fit. While “Venture” can include Series D, E, F and so on, the market is moving away from countless rounds of fundraising. There was a time when you could continue to fundraise without revenue, but this mindset is changing in Venture Capital. At the “Growth” stage, companies need an influx of cash to expand. They already have product-market fit and are focused on scaling. Granted, the distinction gets fuzzy between late-stage Venture and Growth. For example, private equity and venture firms alike can invest in “growth-stage” companies.
Q: Describe Malk’s Growth and Venture services. How do they differ from how we support Buyout clients?
A: As these target companies are still maturing, we take a forward-looking approach. For example, where is the business going in the next two years? How will it evolve over time? Will it expand into new geographies? How will these changes impact the company’s risk profile and required capacity to mitigate that risk at scale?
Our goal through diligence is to identify any “red flags” that could be prohibitive to an investor and create an ESG guidance that the companies can leverage as they scale. We want this process to be value-additive to our clients and the portcos. To do so, we survey the management team, asking about their business model, plans to scale, and immediate capacity points to manage risk. Discussions with early-stage founders address how they see the company changing over the next few years – headcount, new products, new geographies. We provide our clients with high-level key findings on business model and industry risks, while our recommendations are incorporated into ESG guidance to help management teams build relevant ESG practices at scale.
There also is a growing presence of impact “social enterprise” startups and purpose-driven investors within Growth and Venture. Because there are growing opportunities for portfolio companies to exit to an impact fund, we include recommendations to further define a company’s route to impact and begin to quantify impact metrics.
Q: One of the key components of Malk’s work is engaging with management teams and founders to build ESG buy-in. How does the Growth and Venture team approach this?
A: Getting buy-in from management teams during Growth/Venture transactions is easier than Buyout for several reasons. In Venture, the founders are often young, so they are often familiar with ESG and/or already prioritize topics like diversity and inclusion or data privacy and security. In both Growth and Venture, the companies are resource-strapped and appreciate the operational ESG guidance that our team provides.
Founders’ biggest fear is that Malk is “auditing” their company and comparing it to a big corporation. They know their ESG program is immature and don’t want to be compared to corporations with greater capacity and resources. Once they realize that’s not our goal, management teams are very supportive of our work. To build buy-in, Malk works to understand the company’s goals and how it intends to scale; we communicate what strong ESG capacity is at each stage of growth and talk through how strong ESG practices can help founders create additional value in future fundraising rounds or be leveraged as a differentiator in often competitive talent markets. Because we tailor our approach to the business’s size and goals, founders are receptive to our recommendations.
Q: You mentioned diversity and inclusion, which is a consistent theme in the ESG community. Do ESG diligence topics differ for Growth companies compared to Buyout? How so?
A: As a firm, Malk has over 12 ESG issue areas (i.e., Anti-Bribery and Corruption; Climate Change; Data Privacy and Security; Diversity, Equity, and Inclusion; Environmental Management; Ethics and Compliance; Food / Product Safety; Patient Quality of Care; Product Stewardship / Impact Opportunity / Adverse Impact Risk; Social and Labor Conditions; Supply Chain Social and Environmental Management; Sustainable Branding; Worker Health and Safety) – the team always considers these ESG topics, but not all are material for our businesses. As the majority of our transactions are in the technology industry, there are five ESG topics that we always include: Ethics and Compliance; Data Privacy and Security; Social and Labor Conditions; Diversity, Equity, and Inclusion (DEI); and Climate Change.
There are many unique ways in which we think about these five ESG topics. For Social and Labor Conditions, human capital trends, like engagement and burnout, are very salient for early-stage tech companies in a competitive labor market. Similarly, DEI is a continued challenge in tech. It’s historically white and male, with harassment issues exacerbated by remote work.
For Ethics and Compliance, ethical data use, data stewardship, and bias in AI development are topical. Specific trends we see in sectors are around health tech, biased use of data in health tech, and stewardship of sensitive data. Digital tech will also increase access to care and create opportunities for trying to capitalize on ethical tech. Fintech and crypto are riddled with ESG concerns. Investors in early-stage companies can benefit from putting ESG practices in place early on to avoid the reputational and legal scrutiny that comes with ESG issues in fintech and crypto.
Climate Change is also a relevant topic for Growth/Venture businesses. Customers, particularly those that are public, may require downstream emissions tracking and reporting. Moreover, if a Growth/Venture company exits through IPO, it is likely that they will be required to track/report emissions to the SEC.
Q: How do Venture and Growth GPs’ ESG programs differ from those in Buyout? How are they similar?
A: ESG programs for Growth/Venture often correspond with LP expectations, and sophistication within an ESG program increases in later stage Growth funds. Growth firms raise funds from institutional capital, often with the same LP pressures as private equity firms. On the Venture side, there’s less institutional capital, but that’s rapidly changing (currently more family offices, HNWI, some endowments). LPs of Venture firms have started asking about ESG in the past few years, with increasing pressure to have strong ESG integration. The UN Principles for Responsible Investment (UNPRI) is coming out with Venture Capital (VC) due diligence questionnaires to set more consistent expectations between VCs and their investors around ESG practices in the space. Venture funds often come to us for guidance on getting ahead of requirements.
More broadly, Growth/Venture firms typically have leaner operations than private equity firms, and do not conduct the same level of diligence. As a result, Growth/Venture firms have lighter touch ESG programs. For instance, it is unlikely that a Venture firm has a full time ESG professional (a Growth firm may have one), and there are certain ESG requirements that are unlikely to carry over to Growth/Venture. For example, expecting a portfolio of pre-seed and series A tech companies to track emissions isn’t realistic today, though we would love to move in that direction. We’re advising on how to integrate ESG into their portfolio through the investment lifecycle while adapting to firm constraints.
Q: Where do you see the Growth/Venture team in the next two years?
A: Because it’s such a nascent area, I want our team to drive thought leadership for ESG in Growth and Venture Capital. It’s a blank slate. Malk was an early mover in ESG and similarly, I want us to be an early mover in VC ESG. Malk is already trailblazing the approach to rightsizing ESG for early-stage companies. We have an opportunity to continue doing that through leading conversations in the VC ecosystem.
Q: Anything else to highlight?
A: The reason ESG is so important to VC is responsible scaling. A company with two people might not have the same risks that we consider for larger companies. However, it’s key to institute processes and create work cultures that are ethical, responsible, and diverse to facilitate growth at scale. For companies like Theranos, Uber, and WeWork, for instance, if they developed such core processes early on, they may have avoided mishaps, saved investors’ money, and kept key founding leadership. There’s a significant call to action in the industry for responsible scaling but minimal structure for how to do so. Our goal as the Growth and Venture team at Malk is to provide that structure for our clients and their investments.
Malk Partners does not make any express or implied representation or warranty on any future realization, outcome or risk associated with the content contained in this material. All recommendations contained herein are made as of the date of circulation and based on current ESG standards. Malk is an ESG advisory firm, and nothing in this material should be construed as, nor a substitute for, legal, technical, scientific, risk management, accounting, financial, or any other type of business advice, as the case may be.